How to build a conglomerate …

I wrote a post a while ago, in response to a reader question, that questioned the sanity of an entrepreur following my path and owning multiple concurrent businesses.

I said: bad idea!

However, Diane points to a number of conglomerates (a collection of related or unrelated businesses under common corporate control) that make money because they diversify into multiple businesses and sectors:

Most conglomerates are good examples of diversified businesses (GE comes to mind). One could also buy complementary businesses. Your risk level is affected the same way as it would be with diversifying any investment.

Your example of multiplying the management teams (and thereby increasing risk to each business) is interesting, Adrian. This is precisely one a buyer of companies is looking for (like your friend Brad) – inefficient management with an underlying fairly decent business. You buy and consolidate, combining the common management (HR, Acctg, IT) that runs across each company, combine anything else you can “leverage” (logistic chains, purchasing power, for examples), and save money, thereby reducing costs and making it even more attractive to investors (depending on which kind you want).

And, it’s true: a conglomerate can diversify a company’s risks, just like diversifying a stock portfolio … the problem is – just like any other diversification strategy – you equally ‘wash out’ your successes with your failures.

My issue is that this may work as a ‘risk mitigation strategy for large companies, but it’s too risky for smaller (e.g. sole, or family) operators.

Large conglomerates build up over time, usually using one successful business to fund the rest. The key is having good management in each … the risk (for a small player, like you and I) is trying to BE that management.

A great example is Warren Buffett: he started Berkshire Hathaway by buying a controlling interest in a mediocre textile company and raised cash simply by stopping the dividend stream to the shareholders …

… he used that cash to buy an insurance company, and used policyholder cash from the insurance company to buy more companies.

The interesting thing is that he does NOT look for companies with poor management; rather he buys GOOD companies with GREAT management and keeps them in place, doing what they do best: creating more cash for his next company purchase … and, so on goes Warren’s $40 Billion – $60 Billion (his personal net worth in Berkshire Hathaway) ‘cash machine’ that owns more than 75 companies!

The problem is that Warren only got to this point because he couldn’t find one company that ‘did the trick’ … he would, however, put 60% to 80% of his entire net worth in just one investment/business, if he could find it!

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One thought on “How to build a conglomerate …

  1. Building a conglomerate has its own attendant problems which can range from funding to personnel and clientele. However, having an access to a client with one arm can create an opportunity for the other arms. But managers should do well with central control using concise weekly or monthly report. Running a conglomerate is great fun though.

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